P11.7 Kinked Demand Curves. Safety Service Products (SSP) faces the following segmented demand and marginal revenue curves for its new infant safety seat:
1. Over the range from 0 to 10,000 units of output,
P1 = $60 – Q
MR1 = DTR1/DQ = $60 – $2Q
2. When output exceeds 10,000 units,
P2 = $80 – $3Q
MR2 = DTR2/DQ = $80 – $6Q
The company’s total and marginal cost functions are as follows:
TC = $100 + $20Q + $0.5Q2:
MC = DTC/DQ = $20 + $1Q
where P is price (in dollars), Q is output (in thousands), MR is marginal revenue, TC is total cost, and MC is marginal cost, all in thousands of dollars.
A. Graph the demand, marginal revenue, and marginal cost curves.
B. How would you describe the market structure of the industry in which SSP operates? Explain why the demand curve takes the shape indicated previously.
C. Calculate price, output, and profits at the profit-maximizing activity level.
D. How much could marginal costs rise before the optimal price would increase? How much could they fall before the optimal price would decrease?